The Long Game

Historically, empires built quickly crash at an even greater
speed. Fast forward from Athens’s golden age to the grandiose Napoleonic era to
modern New York. All prime examples of remarkable growth that lead to a
historic downfall. Similarly, in the past 20 years, China has riotously become
a new industrialized empire with a strong government to match. The key to the
new booming economy however is that its growth is slowing, and heavy investment
in the real estate market has caused concern regarding a bubble burst. However,
the Chinese Communist Party’s new outlook on state owned enterprises will
enable them to overcome opposition to liberalization reforms and therefore
handle the bursting of the real estate bubble and slowing economic growth.

In an effort to avoid the bursting of the real estate market
bubble, the party is moving investors away from real estate and towards a
future in stock market. In an article for Bloomberg
Business, Enda Curran discusses the Communist Party’s need to reinvent the
way the economy functions to maintain growth. “Chinese officialdom has little
choice but to tap on the brakes of the old-line economy. Years of politically
driven investment with diminishing returns led to too much debt and industrial
overcapacity, as well as ghost towns with unfinished hotels and unoccupied
residential towers” (The Major Paradox at the Heart of the Chinese Economy) Curran
sheds light on ‘ghost towns’ present throughout China, which are solely used
for economic investment. Moreover, she echoes the sentiments of many who see
these towns as a warning of the bursting bubble. Her emphasis on China’s need
to move away from an economy with diminishing returns promotes the risks of an
increasing debt ceiling. In early 2014, 60 minutes reported the same issues
discussed in Curran’s article regarding the real estate market and its effect
on the economy.

With a need to move towards new industries to avoid the
issues brought by ‘ghost towns’, the Communist Party has pushed investors
towards the stock market in an effort to boost the slowing Chinese economy. The Economist article‘The Bubble Question’ introduces the
relationship between the stock market and the economy as the Chinese government
pushes for more investment. “Between 2010 and early 2014, when China boasted
the world’s fastest-growing economy, its stock market was consistently among
the world’s worst performers. Since July of last year, this relationship has
flipped. Whereas China’s growth has drifted steadily lower, its shares indices
have double in value” (The Bubble Question) The government’s shift towards a newly
developing stock market invites a new wave of investors in an effort to push
economic growth forward. By turning towards the stock market and away from the
traditional economy the Chinese Communist Party is therefore creating an
opportunity for an increased economic growth rate.

By enticing investors to invest in the newly booming stock
market, the Chinese government helps pump money into a slowing economy. The Bloomberg Business article ‘The Major
Paradox at the Heart of the Chinese Economy’, discusses the possible lack of
visible results in statistical numbers as the economy changes course. “’China’s
economy is in a very critical period of restructuring,’ said Zhang Bin, a
senior fellow at the Chinese Academy of Social Sciences in Beijing. And there
will be economic pain as the government pushes through overdue structural
reforms” (The Major Paradox at the Heart of the Chinese Economy) ‘Economic
pain’ will likely result in a continual slowing of visible growth as the party chooses
different paths for economic expansion. However, once structural reforms have
been resolved, new investment will boost economic growth. The key to a new
innovative economy is the continual economic support from the stock market as
described in Bloomberg Business. “Xi
and Premier Li Keqiang are trying to defuse that debt bomb, rein in banks and
local governments and promote the nation’s stock markets as a primary way for
innovative and smaller companies to raise capital” (The Major Paradox at the
Heart of the Chinese Economy) China’s amounting debt is a growing issue
blocking the way for economic growth, and the opportunity for smaller companies
to receive loans from state-owned banks. The stock market, however, has proven
its capability in providing broader financial stability, and in creating a more
equal relationship between its success and the success of the economy. “With a
big jump in borrowing to buy shares, the stock market is beginning to affect
broader financial stability. China needs to develop more mature capital markets
so that firms can raise more money directly from investors, taking some of the
burden away from banks” (Skyward March) A ‘directly from investors’ approach
provides an opportunity for a more liberalized form of market where the people
have a say in the returns of their investments and economic cash flow. This new
point of view allows the lower middle class to gain access to a better income
and way of life.

Even with flexibility regarding a more liberalized market,
the Communist Party still controls many developing sectors of the economy. Bloomberg Business article ‘The Major
Paradox at the Heart of the Chinese Economy’, depicts a China in a high-risk
high reward game of balance as the economy changes course. “China is in the midst
of an ambitious and risky, rebalancing act – away from its old growth model of
credit-fueled, investment-led and export-powered growth that astounded the
world with 10 percent annual average GDP gains from 1980 to 2012” (The Major
Paradox at the Heart of the Chinese Economy) The trickiness of such an
important balance is emphasized as large companies begin to monopolize certain
industries. A shift in the wrong direction could have drastic consequences for the
elite of the Communist Party as well as the upper class, who have garnered
increased revenue in recent years.

China’s growing demand for energy enables increased wealth
of an elite few primarily concentrated in the booming oil sector.

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The digital image taken from the Wall Street Journal’s article ‘China’s Frugal Oil Companies’ taken
of an oil rig off China’s coast portrays China’s growing demand for energy
recourses such as oil. The countries’ energy consumption will be an important
factor in shaping the future economy. In an article published by The Wall Street Journal, Li Xin sheds
light on the ‘petroleum clique’ who monopolize the oil industry. He writes, “Although
they [Chinese big three oil companies] are backed by state-owned banks, their
pockets are not unlimited and the debt-to-asset ration is something management
has started to worry about” (China’s Frugal Oil Companies) Since its formation,
the ‘petroleum clique’ has posed as a threat to the power of the Communist
Party and high ranking party officials in charge of the state owned banks that
supply the oil industry with cash flow. The article ‘The Chinese Oil Sector:
Beijing’s Latest Anti-Corruption Target’ in the Stratfor magazine discusses the clique’s connections in the
government. “The political connections it [‘the petroleum clique’] created
enabled officials from the oil industry to occupy influential government
positions, through which they could shape public policy and resist Beijing’s
attempts for control” (The Chinese Oil Sector: Beijing’s Latest Anti-Corruption
Target) Therefore, the threat of a few powerful elite members of monopolized
industries has had definite impact on government policies, and will shape the
expanding economy in the future.

The Chinese Communist Party’s growing concern with wealthy
and powerful elite have prompted a slew of anti-corruption campaigns lead by President
Xi Jinping since 2011. The article ‘The Chinese Oil Sector: Beijing’s Latest
Anti-Corruption Target’ suggests that “The anti-corruption drive has proved to
be a useful tool the new administration can wield to achieve its political and
economic priorities, particularly as the leadership consolidates power” (The
Chinese Oil Sector: Beijing’s Latest Anti-Corruption Target) The tactic to
rebalance power in China has historically been used in the Yan’an Rectification
Movement in the 1940s introduced by Mao Zedong as a way to improve the function
of the state. Proven to be a useful tool, President Xi Jinping’s use of
anti-corruption campaigns has helped reinstate control to the Chinese
government. Moreover, the anti-corruption campaigns have also been useful in
cycling party leaders to help with the economic shift as described by the Stratfor article. “As part of the
Communist Party’s anti-corruption drive, the investigation into the company
will help new party leaders reassert authority in an industry beset by massive
inefficiencies and vested bureaucratic interests – even as they allay public
concern over government malfeasance” (The Chinese Oil Sector: Beijing’s Latest
Anti-Corruption Target) As the government reasserts authority over monopolized
sectors of the economy, the government gains popularity with the public.
Moreover, a greater control of the state throughout all sectors leaves room for
the party to meet China’s economic goals throughout all industries.

Even with greater control in monopolized industries, the
party’s search for solutions to maintain constant economic growth has turned
towards liberalizing interest rates. The
Wall Street Journal’s article ‘Interest Rate Liberalization – With Chinese
Characteristics’ provides insight into a government working towards a more
liberalized economy while still trying to maintain control over certain
industries. “As part of an effort to open up the Chinese economy, the
central bank has said it wants to do away with its controls on domestic
interest rates - and it might even complete the ambitious task this year”
(Interest Rate Liberalization – With Chinese Characteristics) Newly liberalized
interest rates provide an important opportunity for the middle class to benefit
from economic growth. By giving all classes access to steadier cash flow with
less government control, the party is expanding the small business sector,
which in turn, boosts the slowing economy. In addition, increasing money flow
has advantages beyond following China’s economic growth plan. It generates
important consequences for the Communist party and the global economy. “One
guess is that interest rate liberalization paves the way for the Yuan’s future
as a global reserve currency – a long-sought goal of Chinese policy makers”
(Interest Rate Liberalization – With Chinese Characteristics) The globalization
of the Yuan is an important step for the government to take in liberalizing
certain industries including the stock market. Taking part in the global
economy will enable China to maintain a high economic growth rate, and allow
small businesses to develop nationally and overseas.

As the government begins to liberalize interest rates, they
are also expanding the gross profit margin of the stock market. As discussed in
‘The Major Paradox at the Heart of the Chinese Economy’, the new cross-border
investment between the Shanghai and Hong Kong stock markets is a promising step
towards further liberalization. “A big catalyst for the stock market boom this
year has been the creation of a new cross-border investment channel called the
Shanghai-Hong Kong Stock Connect that allows investors in Hong Kong and China
to trade a specified rage of listed stocks in each other’s markets” (The Major
Paradox at the Heart of the Chinese Economy) The party’s investment in the
continual growth of the economy is an important factor to consider in the
liberalization of stocks on a global level. For now, the Shanghai-Hong Kong Connect
expansion is a step in liberalizing the stock market nationally, which enables homegrown
companies to further develop. The digital image from The Economist article ‘The Bubble Question’ sheds light on the
access given to lower and middle classes, and the opportunities provided by
having a safe way to invest. Moreover, the image reflects the stock market as a
necessary tool for the people of China as well as for the party and government
to achieve a higher income and national economic growth rate.

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Digital image from The Economist article ‘The Bubble
Question’

In the long term, however, China’s expansion into a growing
stock market comes with its own fair share of problems, which need to be solved
with new economic reforms. “The long game is to transform China’s $10.4
trillion economy into a more sustainable one, featuring a vibrant service
sector and a more diversified finance industry that doesn’t rely so heavily on
state-owned banks to allocate capital” (The Major Paradox at the Heart of the
Chinese Economy) Therefore, the stock market provides an opportunity for a
future ‘self-reliant’ China. However, a push away from state-owned banks is an
important solution in the party’s hope to reduce corruption and debt. Although
the world would like to see a fully liberalized stock market, a controlled
liberalization is a more realistic approach for the party to take.

The Chinese Communist Party’s new outlook on state owned
enterprises and the booming stock market will enable them to overcome
opposition regarding liberalization reforms and therefore handle the slowing
economic growth and avoid the bursting of the real estate bubble. The party’s
move away from the real estate market and towards the stock market is a
promising change in maintaining constant economic growth. Moreover, the
expansion of the stock market helps avoid future issues such as a rising debt
ceiling, and promotes a more innovative economy with a greater number of “made
in China” companies. In addition, the expansion of the stock market with the
Shanghai-Hong Kong Connect provides an opportunity for the people of China to
gain increased revenue. In turn, a new wave of upper middle class and upper
class investors will enter the economic cycle, and help reduce the continual
monopolization of certain industries as well as the elite controllers of those
companies. By historical precedent, however, a realistic national and global
investor will understand that the party will maintain control over the economy
as a whole, and will be continually involved in economic reforms to ensure a
successful growth rate as sectors such as the stock market expand.